Business Finance
BA303 ♦ Spring 2013
Michael Dimond
Module H: Forecasting for Financial Management
• Financial planning process
• Building pro forma financial statements
• Analyzing & using pro forma financials
• You can skip P4-7 & P4-8 in the homework (cash receipts &
cash disbursements)
• You can skip P4-19 & P4-20 in the homework
(comprehensive pro forma statement problems)
Michael Dimond
School of Business Administration
Financial Planning Process
• Plans are developed according to purpose
• Strategic Plan - long term (e.g. 5-year)
• Necessarily less specific than operating plan
• Tied to strategic goals
• Strategic plan guides CapEx budget
• Operating Plan - short term (e.g. 1-year)
• Based on forecasts of sales & capacity
• Operating Plan (O.P.) provides operating budget & cash budget
• Used with pro forma financial statements to predict profit & cash flow
• Plans are adjusted as needed
• Strategic plan usually updated annually (or sooner, if events warrant)
• Operating plan usually updated quarterly
Michael Dimond
School of Business Administration
Pro Forma Financial Statements
• Pro forma = “in the form of”
• Pro forma financials use the form of a balance sheet and income statement to
present forecast information and support financial planning & analysis (FP&A)
• Profit is the foundation of cash flow (see 4.1 Analyzing the firm's cash flow)
• Cash flow is usually forecast through budgets: Capital budget, cash budget,
operating budget, etc.
• Profit comes from operations
• Pro forma income statement
• Assets support operations
• Pro forma balance sheet
• Pro forma financials are based on past performance and
adjusted for expectations
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Common-size financials
Marketing forecasts
Capacity analysis
CapEx budgets
Michael Dimond
School of Business Administration
Preparing the Pro Forma Income Statement
• Start with sales forecast
• Volume x Price = Revenue
• Estimate direct costs
• Volume x Variable Cost per Unit = Total Variable Costs
OR
• COGS as % of Sales (from common size income statement)
• Estimating other costs
• Percent-of-sales method uses data from common-size income statement
• Not everything grows at the same rate as sales (e.g. Depreciation)
Michael Dimond
School of Business Administration
Preparing the Pro Forma Balance Sheet
• Three approaches
• Percent-of-sales method
• Simplest method: All line items are estimated as a percent of sales
• Not necessarily accurate for all items (e.g. PP&E)
• Judgmental Approach
• Estimate specific line items
• Determine imbalance (i.e. does A=L+SE?)
• “Plug” the imbalance with external funds (debt or equity brought into the firm)
• External funds figure is frequently abbreviated EFR, EFN, AFR, AFN
• Total Asset Turnover suggest what total assets should be
• TAT = Sales/Total Assets, :. Sales/TAT = Total Assets Forecasted
• Estimate line item values based on common-size balance sheet
• Consider how stable the common-size B/S has been over past years
Michael Dimond
School of Business Administration
Evaluating Pro Forma Financials
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Forecasts are not certain
Check the arithmetic & the internal logic
Common-size financials (vertical analysis)
Rates of growth of line items (horizontal analysis)
Ratio analysis (what questions do you need to answer?)
Examine OCF & FCF compared to history
• How would you value a company based on pro forma
financial information?
Michael Dimond
School of Business Administration
P4-5 Sources & Uses of cash
Michael Dimond
School of Business Administration
P4-15 Pro Forma IS
Michael Dimond
School of Business Administration
P4- 16 Pro Forma IS with Scenario (part a)
Michael Dimond
School of Business Administration
P4- 16 Pro Forma IS with Scenario (part c)
Michael Dimond
School of Business Administration
P4-17 Pro Forma BS
Michael Dimond
School of Business Administration
P4-18 Pro Forma BS with Financing Needs
Michael Dimond
School of Business Administration
P4-19 Comprehensive Pro Formas w/ EFN
Michael Dimond
School of Business Administration
P4-20 Comprehensive Pro Formas w/ EFN
Michael Dimond
School of Business Administration